Do Markets React Rationally? The Effect of the September 11th Tragedy on Airline Stock Returns

On September 11, 2001, terrorists launched a devastating attack against the United States using commercial airliners loaded with jet fuel as weapons. Using the multivariate regression model methodology, we investigate the reaction of airline stock prices to the attack. We test whether the market reaction on September 17th, the first trading day after the attack, was the same for each airline or whether the market distinguished among airlines based on firm characteristics (i.e., rational pricing). Our findings support the notion of rational pricing and suggest that the market differentiated among various airlines. Cross-sectional results suggest that the market was concerned about the increased likelihood of bankruptcy in the wake of the attacks and distinguished between airlines based on their ability to cover short-term obligations (i.e., liquidity)